From the Downsizing Bloghttp://www.downsizinggovernment.org/blog
enCoercion Is Bad Economicshttp://www.downsizinggovernment.org/coercion-bad-economics
<div class="field field-name-field-authors field-type-taxonomy-term-reference field-label-hidden"><div class="field-items"><div class="field-item even">Chris Edwards</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"><p>A common feature of Obama administration economic policies is the use of government coercion. The Obamacare health law mandated that individuals buy insurance. The administration&#8217;s tax increases grabbed more earnings from millions of people. And federal agencies are imposing an increasing pile of labor, environmental, and financial regulations on businesses.</p><p>Pro-market policy experts point out the negative effects of each intervention, but the administration keeps dreaming up with new ways to take our money, restrict what we do, and manipulate the economy.&nbsp;</p><p>Liberals or progressives seem to have no inkling of why free economies work better than economies based on central authority. They favor using centralized force apparently because they think that it creates practical benefits.</p><p>But coercion is not a practical way to help the economy—regulations and taxes rarely make us better off. Some people may gain, but the vast majority of people lose. Coercion tends to destroy value, not create it.</p><p>There are at least four fundamental reasons why.</p><p>First, because the government uses coercion, its actions are based on guesswork. Regulations are top-down commands, not efforts at finding common agreement. Spending relies on compulsory taxation, not voluntary customer revenue. So government actions generate no feedback regarding whether or not they generate any net value.</p><div id="ym_1044036704457308825">&nbsp;</div><p>Compare that to markets. We know markets generate value because they are based on voluntary and mutually beneficial exchanges. Decisionmaking in markets is a reality-based system guided by individual preferences.</p><p>Consider the purchase of aircraft. In the private sector, an airline chooses the number to buy based on the demand for air travel, which is aggregated through the price system from choices made in the marketplace. By contrast, when the Pentagon buys aircraft, it has no price system or measured demand to guide it, so its decisions are made flying blind.</p><p>Second, government actions often destroy value because they create winners and losers. Regulations squelch personal choices and impose one-size-fits-all rules. The amount of federal spending on each program is chosen for the whole nation, and thus differs from the amount that would be favored by each individual.&nbsp;</p><p>In markets, people choose the amount of each item they purchase, and they can pursue a vast array of different interests, lifestyles, and careers. “The great advantage of the market,” Milton Friedman said, “is that it permits wide diversity,” while “the characteristic feature of action through political channels is that it tends to require or enforce substantial conformity.”</p><p>Liberals like using the word “diversity,” but it is free markets that actually deliver it. With their support of big government, liberals seem to believe that people can be made better off by quashing their individual choices. But with America&#8217;s increasingly pluralistic society, it makes more sense to allow for diverse market solutions, rather than top-down rules from Washington.</p><p>Third, government activities fail to create value because the funding comes from a compulsory source: taxes. Unlike in markets, bad government decisions are not punished and failed policies are not weeded out because the funding is not contingent on performance. Low-value programs can live on forever, and they block the reallocation of resources to better uses.</p><p>In markets, the quest for profits spurs businesses to search for better ways of doing things. Businesses aim to maximize value for themselves, and they end up boosting the broader economy, which is the “invisible hand” of Adam Smith. In government, there is no invisible hand, no guide to steer policymakers in a constructive direction.</p><p>Fourth, government programs often fail to generate value because the taxes to support them create “deadweight losses” or economic damage. Taxes are compulsory, and so they induce people to avoid them by changing their working, investing, and consumption activities. That reduces overall output and incomes.</p><p>Let&#8217;s say that the government imposes a tax on wine. That would transfer money from wine drinkers to the recipients of government programs. But an additional cost—the deadweight loss—would be created as people cut back their wine consumption. People would enjoy less wine and suffer a reduction in welfare or happiness.</p><p>The wine tax has blocked mutually beneficial exchanges from taking place, and thus has damaged the economy. The size of the damage depends on the type of tax, but for the income tax, empirical studies show that the deadweight loss of raising taxes by a dollar is roughly 50 cents.</p><p>Suppose that a philanthropist spends $10 million on a charitable program that generates $12 million in benefits. That private program would be a success. But a similar program run by the government would be a failure because the tax funding would create deadweight losses. The government program would cost $10 million directly, plus another $5 million in deadweight losses, for a total cost that is higher than the benefits.</p><p>In sum, coercion imposes deadweight losses and creates winners and losers, which is the polar opposite of the win-win exchanges in markets. Politicians may hope that their interventions create more winners than losers, but that is wishful thinking because their decisions are based on no more than guesswork.</p><p>Liberals might assume that the government has an advantage in tackling society&#8217;s problems because it is such a powerful institution. But because it uses coercion to raise funds and impose its will, the government tends to make bad decisions, entrench them, and drag the whole economy down.</p><p>This piece originally appeared on Reason.com</p></div></div></div>Mon, 27 Jul 2015 17:18:04 +0000Chris Edwards1475 at http://www.downsizinggovernment.orgJared Bernstein Tilts His Tax Factshttp://www.downsizinggovernment.org/jared-bernstein-tilts-his-tax-facts
<div class="field field-name-field-authors field-type-taxonomy-term-reference field-label-hidden"><div class="field-items"><div class="field-item even">Chris Edwards</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"><p>Former Obama administration economist, Jared Bernstein, argues for higher taxes&nbsp;<a href="http://www.nytimes.com/2015/07/22/opinion/the-case-for-a-tax-on-financial-transactions.html?_r=0" target="_blank">in a&nbsp;<em>New York Times</em>&nbsp;op-ed yesterday</a>. His piece begins:</p><blockquote><p>Like it or not, the campaign season is upon us, and that almost certainly means somebody is going to try to buy your vote with a tax cut — even though average federal tax rates are already low in historical terms, our tax code remains tilted in favor of the wealthy, and our children, neighborhoods and infrastructure desperately need public investment.</p></blockquote><p>I tried to use my imagination and think of how a thoughtful and intelligent liberal like Bernstein might conceive of tax policy. But I could not come up with any scenario under which this statement might be considered true: “our tax code remains tilted in favor of the wealthy.” &nbsp;&nbsp;</p><p>The plain fact of the matter is that the federal tax system is highly graduated, or what liberals call “progressive.” Lower-income households pay much smaller shares of their income in taxes than do higher-income households.</p><p>In his article, Bernstein uses data from the respected Tax Policy Center (TPC),&nbsp;<a href="http://www.taxpolicycenter.org/numbers/Content/PDF/T15-0049.pdf">as I do here</a>. The first table shows TPC estimates of average federal tax rates (total taxes divided by income) for U.S. households (specifically, “tax units”) in five income groups.</p><p align="center">Average Federal Tax Rates, 2015</p><div align="center"><table border="1" cellspacing="0" cellpadding="0"><tbody><tr><td valign="top" width="125">Income Group</td><td valign="top" width="96">Income Tax</td><td valign="top" width="96">Payroll Tax</td><td valign="top" width="96">Other Taxes</td><td valign="top" width="96">Total Taxes</td></tr><tr><td valign="top" width="125">Lowest</td><td valign="top" width="96"><p align="center">-5.0%</p></td><td valign="top" width="96"><p align="center">6.4%</p></td><td valign="top" width="96"><p align="center">2.2%</p></td><td valign="top" width="96"><p align="center">3.6%</p></td></tr><tr><td valign="top" width="125">Second</td><td valign="top" width="96"><p align="center">-1.9</p></td><td valign="top" width="96"><p align="center">7.6</p></td><td valign="top" width="96"><p align="center">2.1</p></td><td valign="top" width="96"><p align="center">7.8</p></td></tr><tr><td valign="top" width="125">Middle</td><td valign="top" width="96"><p align="center">2.9</p></td><td valign="top" width="96"><p align="center">7.9</p></td><td valign="top" width="96"><p align="center">2.3</p></td><td valign="top" width="96"><p align="center">13.1</p></td></tr><tr><td valign="top" width="125">Fourth</td><td valign="top" width="96"><p align="center">6.1</p></td><td valign="top" width="96"><p align="center">8.4</p></td><td valign="top" width="96"><p align="center">2.5</p></td><td valign="top" width="96"><p align="center">17.0</p></td></tr><tr><td valign="top" width="125">Highest</td><td valign="top" width="96"><p align="center">15.6</p></td><td valign="top" width="96"><p align="center">6.0</p></td><td valign="top" width="96"><p align="center">4.1</p></td><td valign="top" width="96"><p align="center">25.7</p></td></tr></tbody></table></div><p>&nbsp;&nbsp; Source:&nbsp;<a href="http://www.taxpolicycenter.org/numbers/Content/PDF/T15-0049.pdf">Tax Policy Center estimates</a>.</p><p>The average household in the highest group will pay 25.7 percent of its income toward taxes in 2015, which compares to 3.6 percent in the lowest group. The average household in the middle group will pay a rate about half that of the highest group. I don’t see how this data can be reconciled with Bernstein’s claim.</p><p>Data from other sources shows the same tilt in tax burdens toward high earners. Actually, “piling on” on high earners is more accurate than “tilt.” The following screenshot is from Table A-6 in&nbsp;<a href="https://www.jct.gov/publications.html?func=startdown&amp;id=4763" target="_blank">this Joint Committee on Taxation report</a>. I’ve circled the key column. Average tax rates rise rapidly as income rises. The highest earners in 2015 will pay an average federal tax rate of 33.1 percent, which is about twice the rate of those with middling incomes, and many times the rate of people at the bottom.</p><p><img src="http://object.cato.org/sites/cato.org/files/wp-content/uploads/tax_rates.png" width="514" height="294" />&nbsp;</p><p>Perhaps Bernstein meant “tilted in favor of the wealthy” compared to other countries. But we have pretty solid data showing that is not correct either. Tax Foundation&nbsp;<a href="http://taxfoundation.org/blog/no-country-leans-upper-income-households-much-us" target="_blank">summarizes OECD data here</a>&nbsp;showing that the U.S. has the most graduated, or progressive, tax system among the high-income nations.</p><p>Bernstein is right that the “campaign season is upon us.” But that doesn’t give him license to tilt tax data upside down to fit his policy narrative.</p></div></div></div>Fri, 24 Jul 2015 14:58:47 +0000Chris Edwards1474 at http://www.downsizinggovernment.orgKeeping Their Promiseshttp://www.downsizinggovernment.org/keeping-their-promises
<div class="field field-name-field-authors field-type-taxonomy-term-reference field-label-hidden"><div class="field-items"><div class="field-item even">Nicole Kaeding</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"><p>In blogs over the last several months, I have revisited the fiscal records of the eight Republican presidential candidates who have gubernatorial experience. As the 2016 race heats up, the candidates will begin making many promises on tax and spending issues, but will we be able to believe them?</p><p>The records show that some governors worked hard to limit the size and scope of government. Others grew government with more spending and higher taxes. The candidates fit into three categories: the “A’s,” the falling grades, and the consistent “B’s”.</p><p>Three of the former governors earned at least one “A” during their tenure: George Pataki of New York, Jeb Bush of Florida, and Bobby Jindal of Louisiana. Pataki earned high marks for slashing state spending by&nbsp;<a href="http://www.cato.org/blog/patakis-fiscal-record">$2 billion</a>&nbsp;and cutting the personal income tax. Bush passed a<a href="http://object.cato.org/sites/cato.org/files/pubs/pdf/pa391.pdf">billion dollar</a>&nbsp;property tax cut coupled with a large business tax cut. Jindal dramatically cut spending. Spending is down&nbsp;<a href="http://www.cato.org/blog/bobby-jindals-fiscal-record">9 percent</a>&nbsp;in Louisiana since fiscal year 2009.</p><p>Pataki’s and Bush’s grades didn’t stay in the upper tier. Pataki fell to a depressing “D” by the end of his tenure because of his support for large spending and tax increases. Spending grew at twice the rate of population growth and inflation during his tenure. He&nbsp;<a href="http://www.cato.org/blog/patakis-fiscal-record">backed</a>&nbsp;several tax hikes and NY issued billions in new debt. Florida’s budget exploded during Bush’s second term, lowering his final grade to a&nbsp;<a href="http://www.cato.org/blog/jeb-bushs-fiscal-record">“C.”</a><a href="http://www.cato.org/blog/jeb-bushs-fiscal-record"><br /></a></p><p>Other governors had precipitous falls too. John Kasich of Ohio received a “B” in his first report card. In 2014 his grade fell to a “D,” and that tied him as the worst Republican governor on fiscal policy in the country. Kasich supported huge spending hikes. Spending<a href="http://www.cato.org/blog/kasichs-fiscal-record">increased</a>&nbsp;18 percent from 2012 to 2015, according to the National Association of State Budget Officers, and he expanded Medicaid over objections from the legislature. He requested another 11 percent increase for fiscal year 2016. Mike Huckabee of Arkansas fell from a “B” to an “F” as he embraced a number of net, new tax increases totaling&nbsp;<a href="http://www.cato.org/blog/huckabees-support-higher-taxes-more-spending">$500 million</a>. He also doubled total state spending.</p><p>The final group of governors includes governors who received consistent, strong grades over their tenures. These governors didn’t set the curve, but did demonstrate a record of tax-and-spending restraint. Rick Perry of Texas earned a “B” on five of his six report cards, with a “C” for the sixth grade. Spending did grow while&nbsp;<a href="http://www.cato.org/blog/rick-perrys-fiscal-record">Perry</a>&nbsp;was governor, but at least its growth was limited to population growth and inflation. Scott&nbsp;<a href="http://www.cato.org/blog/scott-walkers-fiscal-record">Walker</a>&nbsp;of Wisconsin passed a &nbsp;large tax cut and large-scale union reforms, but spending grew a bit quicker than the national average. Chris Christie of New Jersey&nbsp;<a href="http://www.cato.org/blog/chris-christies-fiscal-record">continues</a>&nbsp;to propose tax cuts and fiscal reforms, but his progress has been stymied by the Democratic-controlled legislature.</p><p>Candidates will offer bold promises of action if they are elected. Many will pledge to cut taxes and federal spending. &nbsp;The records of past governors provide some evidence to determine whether a candidate’s promises should be trusted or if the promises are just bluster to garner support.</p><p>Note: This piece discusses the eight former or current Republican governors running for the presidency. Two former Democrat governors are also running. Below is a summary of all ten candidates’ fiscal records while governor:</p><ul><li><a href="http://www.cato.org/blog/jeb-bushs-fiscal-record">Jeb Bush</a></li><li><a href="http://www.cato.org/blog/chafees-fiscal-record-rhode-island">Lincoln Chafee</a></li><li><a href="http://www.cato.org/blog/chris-christies-fiscal-record">Chris Christie</a></li><li><a href="http://www.cato.org/blog/huckabees-support-higher-taxes-more-spending">Mike Huckabee</a></li><li><a href="http://www.cato.org/blog/bobby-jindals-fiscal-record">Bobby Jindal</a></li><li><a href="http://www.cato.org/blog/kasichs-fiscal-record">John Kasich</a></li><li><a href="http://www.cato.org/blog/martin-omalleys-tax-increases">Martin O’Malley</a></li><li><a href="http://www.cato.org/blog/patakis-fiscal-record">George Pataki</a></li><li><a href="http://www.cato.org/blog/rick-perrys-fiscal-record">Rick Perry</a></li><li><a href="http://www.cato.org/blog/scott-walkers-fiscal-record">Scott Walker</a></li></ul></div></div></div>Wed, 22 Jul 2015 15:13:50 +0000Chris Edwards1473 at http://www.downsizinggovernment.orgKasich’s Fiscal Recordhttp://www.downsizinggovernment.org/kasichs-fiscal-record
<div class="field field-name-field-authors field-type-taxonomy-term-reference field-label-hidden"><div class="field-items"><div class="field-item even">Nicole Kaeding</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"><p>John Kasich, the Governor of Ohio, makes his presidential announcement today. He becomes the 16th&nbsp;person to join the Republican field and the 8th&nbsp;current or former governor.</p><p>Kasich is a fiscal policy expert. He has made a federal Balanced Budget Amendment a key<a href="http://www.washingtontimes.com/news/2015/jan/21/kasich-to-push-balanced-budget-amendment-in-six-st/" target="_blank">talking point</a>&nbsp;in his speeches and appearances so far, and was known for being a budget cutter while in Congress. His record in Ohio tells a very different story. Spending has risen rapidly &nbsp;during Kasich’s tenure in Columbus.</p><p>Data from the National Association of State Budget Officers illustrates the rapid growth general fund spending. From fiscal year 2012, Kasich’s first full fiscal year, to fiscal year 2015, general fund spending increased in Ohio by 18 percent. Nationally, state general fund spending increased by 12 percent during that period. Kasich’s proposed budget for fiscal year 2016 increased spending further. It included a year-over-year increase of 11 percent. The average governor proposed a spending increase of 3 percent from fiscal year 2015 to fiscal year 2016.</p><p>Much of the increase is due to Kasich’s support of Medicaid expansion. In 2013 the Ohio House of Representatives opposed Medicaid expansion. They inserted a provision in the state budget forbidding the Kasich administration from expansion without their approval. Kasich stripped the provision from the budget and then proceeded to expand the program without their approval.</p><p>Just 18 months after the expansion took effect, the costs have exploded. According to a<a href="http://www.lsc.ohio.gov/fiscal/bfn/v38n11.pdf">recent report</a>&nbsp;from the state’s Legislative Service Commission, costs are 63 percent, or $1.4 billion, over budget. The report says the overage is because of “higher than expected caseloads and per person costs.” &nbsp;The expansion population was&nbsp;<a href="http://watchdog.org/228330/ohio-obamacare-expansion-4billion/" target="_blank">600,000</a>&nbsp;in June of 2015, compared to estimates of 366,000. Medicaid expenditures are&nbsp;<a href="http://www.lsc.ohio.gov/fiscal/bfn/v38n11.pdf">9.5 percent</a>&nbsp;higher in fiscal year 2015 than they were in fiscal year 2014.</p><p>Much of this spending increase underlies Kasich’s grades on Cato’s Governors Report Card. Kasich received a respectable “B” in&nbsp;<a href="http://www.cato.org/publications/white-paper/fiscal-policy-report-card-americas-governors-2012">2012</a>, but his score plummeted to a “D” in&nbsp;<a href="http://www.cato.org/publications/white-paper/fiscal-policy-report-card-americas-governors-2014">2014</a>&nbsp;as the spending increases started. He scored the worst of any governor—Republican or Democrat—on spending in the 2014 report card. And Kasich tied for the worst grade overall of any Republican governor.</p><p>Kasich has made some progress on tax reform. The personal income tax was cut in 2013, 2014, and 2015. Kasich supported a plan to exclude a portion of small-business income from taxation in 2013 and to expand the provision in 2015. But Kasich has also supported several tax increases, such as increasing taxes on shale gas and oil, the state’s gross receipts tax, and cigarettes.</p><p>Overall, Kasich’s legacy in Columbus is disappointing. He has presided over large spending increases. His proposed fiscal year 2016 spending increase was three times larger than the national average among the states. While he has made some meaningful tax reforms, his support for bigger government in numerous areas is troubling.</p></div></div></div>Tue, 21 Jul 2015 16:01:58 +0000Chris Edwards1472 at http://www.downsizinggovernment.orgFunding Highways: States Can Do Ithttp://www.downsizinggovernment.org/funding-highways-states-can-do-it
<div class="field field-name-field-authors field-type-taxonomy-term-reference field-label-hidden"><div class="field-items"><div class="field-item even">Chris Edwards</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"><p>Congress faces a deadline at the end of July to extend federal highway funding. Policymakers are likely to cobble together a short-term fix for the funding gap in the Highway Trust Fund (HTF), rather than enacting a permanent solution.</p><p><a href="https://www.cbo.gov/sites/default/files/cbofiles/attachments/43884-2015-03-HighwayTrustFund.pdf">Annual HTF spending is projected</a>&nbsp;to be $53 billion and rising in coming years, while HTF revenues will be $40 billion. That leaves an annual funding gap of at least $13 billion. A good permanent fix would be to cut federal spending by $13 billion to match the revenues. State governments could fill the gap with their own funding, efficiency improvements, or privatization.</p><p>That straightforward decentralization solution is not popular with highway lobby groups, and it is usually not mentioned as an option by reporters. A recent&nbsp;<a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2015/06/25/why-driving-on-americas-roads-can-be-more-expensive-than-you-think/" target="_blank"><em>Washington Post</em>Wonkblog</a>&nbsp;column is typical. It examined road quality and potholes in the states, and then concluded that more federal money was needed.</p><p>The&nbsp;<em>Post</em>&nbsp;<a href="http://www.washingtonpost.com/opinions/states-can-fill-potholes-on-their-own/2015/07/17/51c02738-2587-11e5-b621-b55e495e9b78_story.html" target="_blank">published my letter</a>&nbsp;in response to Wonkblog on Saturday:</p><blockquote><p>The article noted that some states (such as California) have many car-damaging potholes, while others (such as Florida) have very few. It said that “we haven’t been putting enough money into the Highway Trust Fund.”</p><p>Actually, the data reveal that California ought to be learning lessons from Florida on how to spend existing funds more efficiently. The fact that some states have much better highways than others shows that states can solve their own highway problems — without the top-down federal actions suggested in the article.</p></blockquote><p>Here are some of the details from the original Wonkblog story:</p><blockquote><p>… 28 percent of the nation’s major roadways—interstates, freeways, and major arterial roadways in urban areas—are in “poor” condition.</p><p>[Other than D.C.] … the worst roads are in California where 51 percent of the highways are rated poor. Rhode Island, New Jersey and Michigan all have “poor” ratings of 40 percent or more. Dang.</p><p>And while everybody loves to make fun of Florida, the Sunshine State actually has the smallest percentage of bad roads in the nation—only 7 percent. Nevada, Missouri, Minnesota and Arkansas round out the top 5.</p></blockquote><p>Note that Florida is a warm and sunny, while Minnesota is cold and snowy, yet they both have very good roads. Meanwhile, California is warm and sunny, while Michigan is cold and snowy, yet they both have very poor roads. Wonkblog correctly notes, “I might have expected weather and latitude to play a big role in road quality, but that doesn’t seem to be the case here.”</p><p>So far so good, but then Wonkblog jumps to his predetermined solution, and completely ignores the implication of the data he had just presented. He says, “One main reason why our roads are in such bad shape is that we haven’t been putting enough money into the Highway Trust Fund to keep up with infrastructure needs.”</p><p>According to Wonkblog’s own chart, only 10 percent of the roads in Minnesota are in “poor” condition, while 51 percent in California are poor. Thus, bad roads are clearly a state-level failing. Wonkblog immediately grabs for the magic wand of more federal funding, but he might have asked what it is that states like Minnesota are doing right with the existing funding.&nbsp;&nbsp;</p><p>The other weird thing about Wonkblog’s conclusion is that he says, “we haven’t been putting enough money into” the HTF. But, of course, it is spending that might affect road quality, not the revenues “into” the fund. If you look at HTF spending, it has remained high in recent years because Congress has filled it with general fund revenues,&nbsp;<a href="http://www.downsizinggovernment.org/reforming-highway-trust-fund" target="_blank">as I chart here</a>.</p><p>In sum, there are apparently dramatic differences in road quality between the states. That may stem from differences in state funding, state efficiency, and state competence, but seemingly not climate conditions. All the states have the ability by themselves to have high quality roads, but some states it appears have important road-investment lessons to learn from the others.</p></div></div></div>Tue, 21 Jul 2015 14:36:17 +0000Chris Edwards1471 at http://www.downsizinggovernment.orgToo Big To Workhttp://www.downsizinggovernment.org/too-big-work
<div class="field field-name-field-authors field-type-taxonomy-term-reference field-label-hidden"><div class="field-items"><div class="field-item even">Chris Edwards</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"><p>Americans have a sour view of the federal government. Just one-third of people think Washington is competent. The public thinks half of taxes collected are wasted.&nbsp;More people say “government” is the nation’s most important problem than they say the economy, immigration, or terrorism.</p><p>And Americans are right. The federal government is wasteful and inept, which is a huge problem because it controls so many aspects of our lives. Federal spending consumes more than a fifth of the nation&#8217;s income, and federal regulations infiltrate a multitude of state, local and private activities.</p><p>In recent years, big scandals have erupted at the Department of Veterans Affairs, Internal Revenue Service, Secret Service and other agencies. Federal auditors routinely uncover waste, fraud and abuse, and revelations about special-interest giveaways in Congress are commonplace.</p><p>But such problems are nothing new. In 1932, legal scholar James Beck explored wasteful federal spending in&nbsp;<em>Our Wonderland of Bureaucracy,</em>lambasting subsidies for shipping and sugar firms, and labeling farm subsidies a “stupendous failure” and “inexcusable legislative folly.” Federal efforts to run businesses were “costly failures” of “extraordinary ineptitude.” And regulations that were supposed to help rail customers instead increased costs. The problem with the government, Beck concluded, was that the “remedy may often be worse than the disease.”</p><p>Failure has always plagued the federal government, and in recent years, that failure has multiplied as the government has grown too big to be adequately managed or overseen. While politicians usually blame federal bungling on the other party, the reality is that the only way to reduce endemic failure is to downsize the government.</p><p><strong>Top-down planning</strong></p><p>To understand the government, let&#8217;s look first at markets. Their driving force is voluntary exchange. Buyers and sellers pursuing their own interests engage in billions of transactions, which are mutually beneficial and thus create value. Markets generate cooperation between disparate people, and they thrive on diversity.</p><p>Government does not work like that. Rather than voluntary exchange, it relies on top-down planning and coercion. As a result, it does not know whether its actions generate value. Because it imposes policies by decree, there is no sure way to know that they make sense.</p><p>The federal government imposes more than 3,000 new regulations each year, and spends trillions of dollars on more than 2,300 subsidy and benefit programs. These are funded by compulsory taxation, not customer revenue. Without voluntary agreement behind its actions, the government is flying blind on its decision-making, and so it makes a lot of mistakes.</p><p>It is true that in markets, businesses also make plenty of mistakes. But when they do, they are punished with financial losses and bankruptcy. A remarkable 10 percent of all American firms go out of business each year. So the market fixes its own mistakes, and it reallocates resources to better uses. By contrast, there is no built-in mechanism to prune waste in government, so the mistakes compound year after year and create rising economic damage.</p><p>Another failure created by the top-down nature of government is that its policies create winners and losers. For example, with the Affordable Care Act, consider that in markets, individuals choose their own levels of goods and service to consume. Markets cater to diversity. But government imposes one-size-fits-all schemes, which invariably make many people worse for wear. This suppression of individual choice in favor of top-down directives destroys value, and it is a key reason we should keep government limited.</p><p>People often assume that government has an advantage in tackling society&#8217;s problems because it is a powerful institution that can use coercion. Actually, the fact that it can mandate actions and has a compulsory revenue stream is a huge weakness that leads it astray. Endemic government failure is baked into the cake because its misguided actions are not self-limiting the way that marketplace actions are.</p><p><strong>Lack of knowledge</strong></p><p>When the government subsidizes and regulates, it throws a wrench into market pricing, the key mechanism that makes economies work. Prices allow millions of individuals and businesses to coordinate their activities. They communicate data about changes in resources, tastes and technology, and they create incentives for people to produce and consume efficiently.</p><p>Whenever the government distorts prices, it can produce a range of unintended negative consequences. Minimum wage laws are intended to help workers, but they raise the cost of hiring low-skill workers, so businesses hire fewer of them. Farm price supports are intended to help farmers, but they prompt farmers to over-produce subsidized crops and under produce other, more valuable, crops.</p><p>Interventions create a range of side-effects. When farmers increase production of subsidized crops, they bid up land prices and bring less fertile lands into production. Those lands may require more intensive fertilizer and irrigation use, which can generate environmental problems. As land prices rise, it becomes harder for young farmers to break into the business.</p><p>Here are other examples of harmful side-effects caused by federal subsidies and regulations:</p><p>· Unemployment insurance induces more unemployment.</p><p>· Subsidized flood insurance induces people to live in riskier flood-prone areas.</p><p>· Irrigation subsidies cause over-consumption of water, which exacerbates droughts.</p><p>· Subsidized loans for housing and college induce people to borrow too much.</p><p>· Traditional welfare encourages people to work less.</p><p>· Ethanol subsidies reduce the cropland available for food and increase food prices.</p><p>· Trade restrictions designed to aid some industries harm others.</p><p>· Business subsidies undermine incentives for companies to innovate.</p><p>· Endangered species laws prompt landowners to rid their land of endangered species.</p><p>· Foreign aid empowers foreign dictators and stalls reforms.</p><p>· Disability benefits encourage people who could work to drop out of the labor force.</p><p>· Social Security and Medicare discourage saving for retirement.</p><p>· Health mandates raise insurance costs and induce firms to drop coverage.</p><p>· Drug prohibition spawns organized crime and violence.</p><p>· Fuel efficiency standards result in more people buying small cars and more road deaths.</p><p>Many policymakers mistakenly see the economy as a simple machine that can be easily manipulated. But they do not have enough knowledge to plan our complex economy successfully, and people are not as easily manipulated as the government thinks.</p><p>Economist Adam Smith famously observed: “The man of system … seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess board. He does not consider that the pieces upon the chess board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.”</p><p>More than two centuries after Smith, governments are still full of “men of system.” They assume mistakenly that by regulating and subsidizing they can reorganize society to fit their vision. The result is failure after failure. One of actor Clint Eastwood&#8217;s most famous lines is, “A man&#8217;s got to know his limitations.” The government should too.</p><p><strong>Misaligned political incentives</strong></p><p>In a romantic view of democracy, legislators always act with the interests of the public in mind. They grapple with policy issues, work toward a broad consensus and pass legislation that has strong support. They reevaluate existing programs and regulations, and prune the low-value and harmful ones.</p><p>Unfortunately, that is not how Washington works. Congress often enacts ill-conceived laws that do not have broad public support. Many programs perform poorly year after year, but receive growing budgets. Programs are almost never terminated because legislators will not admit that their favored programs do not work. Many failed programs are described at Cato&#8217;s <a href="http://www.DownsizingGovernment.org">www.DownsizingGovernment.org</a>.</p><p>The fundamental incentive steering political behavior is re-election. So members cater to voters in their districts, which is often a good thing. But it is also a source of policy failure because members focus on gaining benefits for their states at the expense of the nation. Many programs are enacted that have higher costs than benefits because minorities of members vigorously push them for parochial reasons.</p><p>Logrolling compounds the inefficiency. Lawmakers can bundle many low-value items — none of which has broad support — into an omnibus bill and gain enough votes to pass it. Logrolling has always been a key cause of wasteful spending. In 1836, for example, Virginia Rep. John Patton criticized a rivers and harbors bill as a “species of logrolling most disreputable and corrupting.” That description matches the way the unpopular Affordable Care Act was rammed through Congress in 2010.</p><p>It is true that some legislators rise above parochial politics and pursue other goals. But those other goals often reflect personal beliefs that are untethered from reality. So the problem is that policymakers have no guide steering them toward making value-added decisions for the nation. Voters can help correct some of the worst abuses and mistakes. But most people are too busy with their lives to focus on the details of policy and the behind-the-scenes machinations on Capitol Hill.</p><p>Government failures are often caused by Congress intervening where it should not. The activist orientation of many members is reinforced by the environment in Washington. Special-interest groups dominate policy discussions. Most witnesses to congressional hearings favor the expansion of programs. Most visitors to member offices plead for special benefits. To lawmakers, the benefits of government action are often immediate and visible, while the costs are usually more distant and abstract.</p><p>Congress uses various techniques to hide the costs of programs. One technique is the use of borrowing, which makes a portion of spending seem “free” to taxpayers. Another technique is employer withholding of income and payroll taxes, which Congress mandates to reduce the psychic pain of paying taxes. With the use of these and other methods of hiding costs, lawmakers are emboldened to pursue additional low-value spending.</p><p>The amount of federal duplication and program overlap is remarkable. The government has 47 job training programs in nine different agencies. It has 15 programs for financial literacy. It has 15 agencies overseeing food safety, 20 programs for the homeless, 80 for economic development, 82 for teacher quality and 80 programs for helping poor people with transportation.</p><p>Legislators are entrepreneurs, and they gain prestige by creating new programs. They do not admit when their favored programs fail because their reputations and pride are on the line. Besides, trying to trim obsolete programs creates enemies, so few members focus on that. The consequence is that, over time, the government carries a growing burden of programs and regulations that weigh down the nation&#8217;s productivity and reduce our freedom.</p><p><strong>Misaligned bureaucratic incentives</strong></p><p>Narratives about executive branch employees usually fall along two lines. They are either hard-working “public servants” who are skilled and politically neutral experts, or they are slothful and inept “bureaucrats” whose mismanagement is behind government failures. Which portrayal is more accurate?</p><p>Actually, the personal characteristics of federal employees is less important than the incentives they face. Federal employees face a range of incentives that generate failure:</p><p>·&nbsp;<strong>Absence of profits:</strong>&nbsp;Unlike businesses, federal agencies do not have the straightforward and powerful goal of earning profits. So agencies have little reason to restrain costs, improve the quality of their services, or increase their management effectiveness.</p><p>·&nbsp;<strong>Absence of losses:</strong>&nbsp;Unlike in the private sector, poorly-performing federal activities do not go bankrupt. There are no automatic correctives to programs that have rising costs and falling quality. In the private sector, businesses are forced by markets to abandon activities that no longer make sense.</p><p>·&nbsp;<strong>Output measurement and transparency:</strong>&nbsp;Business output can be measured by profits, revenue and other metrics. But government output is difficult to measure, and the missions of agencies are often vague and multifaceted. That makes it hard for Congress and the public to judge agency performance and hold officials accountable for results.</p><p>·&nbsp;<strong>Rigid compensation:</strong>&nbsp;Federal employee pay is based on standardized scales generally tied to longevity, not performance. The rigid pay structure makes it hard to encourage improved efforts or to reward outstanding achievements. The pay structure also reduces morale among the best workers because they see the poor workers being rewarded equally. Furthermore, the best workers have the most incentive to leave, while the poor workers will stay, decade after decade.</p><p>·&nbsp;<strong>Lack of firing:</strong>&nbsp;Disciplining federal workers is difficult because of strong civil service and union protections. Just 0.5 percent of federal civilian workers are fired each year, which is just one-sixth of the private-sector firing rate. The firing rate is just 0.1 percent in the federal senior executive service, which is just one-twentieth of the firing rate of corporate CEOs.</p><p>·&nbsp;<strong>Bureaucratic layering:</strong>&nbsp;American businesses have become leaner in recent decades, with flatter managements. By contrast, the number of layers of federal management has greatly increased. Paul Light of the Brookings Institution found that the number of layers in the typical agency has jumped from seven to 18 since the 1960s. He argues that today&#8217;s “over-layered chain of command” in the government is a major cause of failure. Overlaying stifles information flow and makes it harder to hold people accountable.</p><p>·&nbsp;<strong>Political appointees:</strong>&nbsp;At the top of the executive branch is a layer of about 3,000 full-time political appointees. Administrations come into office eager to launch new initiatives, but they are less interested in managing what is already there. Political appointees may think that they know all the answers, so they repeat mistakes. The average tenure of federal political appointees is short — just two and half years — and so they shy away from tackling longer-term, structural reforms. Another problem, as we sadly witnessed during Hurricane Katrina, is that many appointees are political partisans who lack management or technical experience.</p><p>Can these problems be fixed? Many presidents have tried, beginning with Theodore Roosevelt and his Keep Commission of 1905. Roosevelt declared, “There is every reason why our executive government machinery should be at least as well-planned, economical and efficient as the best machinery of the great business organizations, which at present is not the case.” Roosevelt was expressing Progressive-era optimism in government. But, as we now know, such optimism was misguided.</p><p>President William Howard Taft appointed a Committee on Economy and Efficiency in 1910. Then there was President Franklin Roosevelt&#8217;s Brownlow Commission in the 1930s, President Harry Truman&#8217;s and Dwight Eisenhower&#8217;s Hoover Commissions in the 1940s and 1950s, President Ronald Reagan&#8217;s Grace Commission in the 1980s and Vice President Al Gore&#8217;s “reinventing government” project in the 1990s. Presidents George W. Bush and Barack Obama also took a crack at improving federal management.</p><p>But these efforts are just tinkering around the edges. Some indicators show that federal performance has gotten worse in recent years, not better. Management reforms cannot solve fundamental structural problems, such as the lack of incentives for cost control in government. The government will always fall far short of private markets in efficiency, value generation and innovation.</p><p><strong>Huge size and scope</strong><span style="font-size: 13.0080003738403px; line-height: 1.538em;">&nbsp;</span></p><p>Federal government has failed since the beginning. A federal effort to run Indian trading posts begun in the 1790s, for example, was beset with waste and inefficiency. Federal failure is a much worse problem today because the government has grown so much.</p><p>Its huge size is overwhelming the ability of lawmakers to allocate spending efficiently and to make needed reforms. Consider that the federal budget of about $4 trillion is 100 times larger than the average state government budget of about $40 billion. The federal government has many more employees, programs, contractors and subsidy recipients to keep track of than any state government. So even if federal legislators spent their time diligently scrutinizing programs, the job is simply too large for them to do effectively.</p><p>The federal government is not just large in size, it is sprawling in scope. In addition to handling core functions such as national defense, the government, as noted, runs more than 2,300 subsidy and benefit programs. It has spread its tentacles into many state, local and private activities, such as education, energy, welfare, housing and urban transit.</p><p>Congress has neither the time nor expertise to oversee all these activities efficiently. Members are spread too thin, which is evident from the fact that they routinely miss all or parts of congressional hearings. Congress grabs for itself vast powers over non-federal activities, but then members do not have the time properly to monitor how their interventions are working.</p><p>Numerous agency failures have erupted into major scandals recently, and each time the White House has claimed to have been unaware of the developing problem. It&#8217;s lack of awareness is another failure. Numerous foreign policy developments have also caught the White House by surprise. The government is involved in so many activities that warnings about brewing failures are not percolating up to the president&#8217;s desk until it is too late.</p><p>Meanwhile, members of Congress spend their time fundraising, securing benefits for their districts and giving speeches, but little time actually learning about policy. Members usually blame government failures on the executive branch, but they often fail in their own oversight roles. When the Secret Service and the VA scandals erupted in 2014, we found out that both of the problems had been developing for years, but went unaddressed by Congress and the executive branch.</p><p>The government is doing too much and doing little well. It is like a conglomerate corporation involved in so many activities that executives are distracted from their core business. Markets force bloated corporations to refocus and shed their low-value activities, but no mechanism forces the federal government to do so.</p><p>The more programs the government has, the more likely they will work at cross purposes. Some federal programs keep food prices high, while others subsidize food for people with low incomes. Some programs encourage people to live in risky flood areas, while others try to reduce flood risks. The government promotes breastfeeding, but it also subsidizes baby formula. Many programs subsidize healthcare and infrastructure, but regulations raise the costs of those activities.</p><p>Ironically, even as Congress has created programs to supposedly help the public, the public has not grown fonder of the government. Instead, people have become more alienated. Pew Research Center finds that the share of people who trust government plunged from more than 70 percent in the early 1960s to about 30 percent by 1980, even though that period was one of government expansion. Trust edged upward slightly during the 1980s and 1990s when domestic spending was being trimmed, but it has fallen since 2000 as the government has grown again.</p><p>As the government has grown larger, leaders have become overloaded. They do not have enough time to understand programs, to oversee them, or to fix them. The more programs there are, the harder it is to allocate resources efficiently, and the more likely it is that programs will work at cross purposes. Within departments, red tape has multiplied, information is getting bottled up under layers of management and decision-making is becoming more difficult because more people are involved. The government is failing more, and the public is getting more disgusted.</p><p><strong>How to fix it</strong></p><p>The federal government and the private sector both fail. The difference is that the government fails more and fixes less. But America desperately needs better governance to meet today&#8217;s challenges in areas such as foreign policy, the global economy and our aging population.</p><p>The solution is to stop centralizing power in Washington, and to begin shifting activities back to the states. State and local governments suffer failures, but their failures are not thrust onto the whole nation. When policies fail in some states, other states can learn the lessons and pursue different strategies. States compete with each other for people and investment, which creates continuous pressure to reform.</p><p>Polls show that Americans support moving power out of Washington. Large majorities of people prefer state over federal control of education, housing, transportation, welfare, health insurance and other activities. People think that state and local governments provide more competent service than the federal government. And when asked which level of government gives them the best value for their taxes, two-thirds of people say state and local governments and just one-third say the federal government.</p><p>In sum, political and bureaucratic incentives and the huge size of the federal government cause endemic failure. The causes of failure are structural, and they will not be solved by appointing more competent officials or putting a different party in charge. Americans are deeply unhappy with the way that Washington works, and everyone agrees that we need better governance. The only way to achieve it is to greatly cut the federal government&#8217;s size and scope.</p></div></div></div>Wed, 15 Jul 2015 15:39:07 +0000Chris Edwards1470 at http://www.downsizinggovernment.orgScott Walker’s Fiscal Recordhttp://www.downsizinggovernment.org/scott-walkers-fiscal-record
<div class="field field-name-field-authors field-type-taxonomy-term-reference field-label-hidden"><div class="field-items"><div class="field-item even">Nicole Kaeding</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"><p>Monday is Scott Walker’s turn to join the crowded presidential field. Walker has served as Wisconsin’s Governor since 2011. He rose to prominence quickly after the State Capitol in Madison was overtaken by protesters opposing his labor reforms. Walker has passed a number of government-limiting measures, earning a “B” on Cato’s Governor Report Card in both&nbsp;<a href="http://www.cato.org/publications/white-paper/fiscal-policy-report-card-americas-governors-2012">2012</a>&nbsp;and&nbsp;<a href="http://object.cato.org/sites/cato.org/files/pubs/pdf/fprc-on-americas-governors_1.pdf">2014</a>, but he continues to support higher spending.</p><p>When Walker took office Wisconsin had a&nbsp;<a href="http://www.jsonline.com/news/statepolitics/115501969.html" target="_blank">$3.6 billion</a>&nbsp;budget deficit and needed urgent reform. His first big legislative achievement was Act 10 which overhauled the state’s collective bargaining rules and benefit programs for state employees. Under Act 10, state employees must contribute 12 percent of premium costs to their state-provided health insurance plan. In addition, pension contributions are now split evenly between the employee and the employer. In 2015 that contribution was 6.8 percent of income.</p><p>Act 10 also limited collective bargaining subjects to base wages, removing the ability to negotiate on overtime, pension, and health benefits. It has saved taxpayers in Wisconsin&nbsp;<a href="http://www.politifact.com/wisconsin/statements/2014/aug/20/scott-walker/scott-walker-says-union-reform-law-brought-massive/" target="_blank">$3 billion</a>&nbsp;since its passage in 2011.</p><p>Walker has also passed several tax cuts while in office. In 2013 Walker signed a plan that cut the state’s personal income tax by almost $500 million a year. The plan consolidated the state’s five income tax brackets into four brackets, with the larger cuts skewed towards the lower end of the income scale. In 2014 the state made further cuts to the lowest income tax bracket. In total, the lowest bracket fell from 4.60 percent to 4 percent. Work is still needed. Wisconsin’s total income tax rate of 7.65 percent is still one of the highest in the country, and its Business Tax Climate is a discouraging&nbsp;<a href="http://taxfoundation.org/article/2015-state-business-tax-climate-index" target="_blank">43rd</a>&nbsp;in the nation, according to the Tax Foundation.&nbsp;</p><p>Walker has had success on labor and tax issues, but spending continues to grow rapidly in Wisconsin. From fiscal year 2012 to fiscal year 2015, Wisconsin state spending grew 15 percent. For comparison, state spending grew by 8 percent nationally during this period.&nbsp; So while Walker turned a $3.6 billion deficit when he took office into an&nbsp;<a href="http://www.jsonline.com/news/statepolitics/wisconsin-legislature-expected-to-act-quickly-on-tax-break-b99119868z1-227718991.html" target="_blank">$800</a>&nbsp;million surplus by June 2013, he has continued to spend excessively.&nbsp; His budget for fiscal years 2016 and 2017 included another $<a href="http://www.bizjournals.com/milwaukee/news/2015/02/04/gov-scott-walkers-budget-includes-663-million-hike.html" target="_blank">1 billion</a>&nbsp;in increased spending.&nbsp;</p><p>Walker’s policies have targeted numerous areas of Wisconsin’s budget. He reformed the state’s labor laws as they related to state employees and saved $3 billion in four years. He cut personal income taxes. Overall, his actions have helped restore fiscal sanity to Wisconsin. But voters concerned about Washington’s debt and profligacy should be aware Walker’s record of increasing state spending even while cutting taxes.</p></div></div></div>Fri, 10 Jul 2015 17:33:37 +0000Chris Edwards1469 at http://www.downsizinggovernment.orgPuerto Rico: Another Harsh Lesson about the Consequences of Violating Fiscal Policy’s Golden Rulehttp://www.downsizinggovernment.org/puerto-rico-another-harsh-lesson-about-consequences-violating-fiscal-policys-golden-rule
<div class="field field-name-field-authors field-type-taxonomy-term-reference field-label-hidden"><div class="field-items"><div class="field-item even">Daniel J. Mitchell</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"><p>When I make speeches about fiscal policy, I oftentimes&nbsp;<a href="https://danieljmitchell.wordpress.com/2014/04/07/the-golden-rule-of-spending-restraint/">share a table showing the many nations</a>&nbsp;that have made big progress by enforcing spending restraint over multi-year periods.</p><p>I then ask audiences a rhetorical question about a possible list of nations that have prospered by going in the opposite direction.Are there any success stories based on tax hikes or bigger government?</p><p>The answer is no, which is why I’ve never received a satisfactory answer to&nbsp;<a href="https://danieljmitchell.wordpress.com/2014/09/24/a-two-question-challenge-for-supporters-of-intervention-and-big-government/">my two-part challenge</a>, even if I limit the focus to fiscal policy.</p><p>And nobody will be surprised to learn that the fiscal crisis in Puerto Rico reinforces these lessons.</p><p>Writing for the Wall Street Journal, Daniel Hanson&nbsp;<a href="http://www.wsj.com/articles/SB11292601245819683363204581059850395301900">explains</a>&nbsp;that the American territory in the Caribbean is on the verge of default.</p><blockquote><p>As Puerto Rico struggles under the weight of more than $70 billion in debt, it has become popular to draw parallels with Greece.</p></blockquote><p>The one theme that is common with the two jurisdictions is that their fiscal crises are the result of too much government spending.</p><p>How bad is the problem in Puerto Rico?</p><p>It’s hard to answer that question because government budgeting isn’t very transparent and the quality and clarity of the numbers that do exist leaves a lot to be desired.</p><p>But I’ve done some digging (along with my colleagues at Cato) and here’s some data that will at least illustrate the scope of the problem.</p><p>First, we have&nbsp;<a href="http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators#">numbers from the World Bank</a>&nbsp;showing inflation-adjusted (2005$) government consumption expenditures over the past few decades. As you can see, overall spending in this category increased by 100 percent between 1980 and 2013 (at a time when the population increased only 12 percent).</p><p>In other words, Puerto Rico is in trouble because it violated&nbsp;<a href="https://danieljmitchell.wordpress.com/2011/10/30/mitchells-golden-rule/">the Golden Rule</a>&nbsp;and let government grow faster than the private sector over a sustained period (just like<a href="https://danieljmitchell.wordpress.com/2009/12/17/is-greeces-fiscal-crisis-caused-by-too-much-spending-or-too-little-revenue/">Greece</a>, just like&nbsp;<a href="https://danieljmitchell.wordpress.com/2015/03/01/the-alberta-example-spending-caps-are-the-way-to-prevent-unsustainable-fiscal-binges-during-growth-years/">Alberta</a>, just like the&nbsp;<a href="https://danieljmitchell.wordpress.com/2012/12/20/a-swiss-style-spending-cap-would-have-prevented-the-current-fiscal-mess-in-america/">United States</a>, etc, etc).</p><p><a href="http://freedomandprosperity.org/wp-content/uploads/2015/07/MyChart.jpg"><img src="https://i2.wp.com/freedomandprosperity.org/wp-content/uploads/2015/07/MyChart.jpg" alt="" /></a></p><p>Here’s another chart and this one purports to show total outlays.</p><p>The numbers aren’t adjusted for inflation, so the increase looks more dramatic. But even if you consider the impact of a rising price level (average annual increase of<a href="http://www.indexmundi.com/facts/puerto-rico/inflation">about 4 percent</a>&nbsp;since the mid-1980s), it’s obvious that government spending has climbed far too fast.</p><p><img src="https://i0.wp.com/mecometer.com/image/linechart-country-historic/puerto-rico/government-expenditure.png" alt="" /></p><p>To be more specific, Puerto Rico has allowed the burden of government to rise much faster than population plus inflation.</p><p>A government can get away with that kind of reckless policy for a few years. But when bad policy is maintained for a long period of time,&nbsp;the end result is never positive.</p><p>Now that we’ve established that Puerto Rico got in trouble by violating&nbsp;<a href="https://danieljmitchell.wordpress.com/2011/10/30/mitchells-golden-rule/">my Golden Rule</a>, what’s the right way of fixing the mess? Is the government responding to its fiscal crisis in a responsible manner?</p><p>Not exactly. Like Greece, it’s too beholden to interest groups, and that’s making (the&nbsp;<a href="https://danieljmitchell.wordpress.com/2012/02/26/whats-the-difference-between-a-libertarian-a-supply-sider-a-keynesian-and-an-imf-bureaucrat/">right kind</a>&nbsp;of) austerity difficult.</p><p>Indeed, Mr. Hanson says there haven’t been any cuts in the past few years.</p><blockquote><p>In the past four years, when the fiscal crisis has been most severe, four successively larger budgets have been enacted. The budget proposed for the coming year is $235 million larger than last year’s and $713 million, or 8%, higher than four years ago. Austerity this is not.</p></blockquote><p>What special interest groups standing in the way of reform?</p><p>The government workforce would be high on the list. One of the big problems in Puerto Rico is that there are far too many bureaucrats and they get paid far too much (gee, this&nbsp;<a href="https://danieljmitchell.wordpress.com/2010/06/01/taxpayers-vs-bureaucrats-the-video-version/">sounds familiar</a>).</p><p>Here are some details from Mr. Hanson’s column.</p><blockquote><p>…more than two-thirds of the territory’s budget is payroll. The proposed budget…contains no plans for head-count reductions. …Median household income in Puerto Rico hovers around $20,000, according to the U.S. Census Bureau, but government workers fare much better. Public agencies pay salaries on average more than twice that amount,&nbsp;a 2014 report&nbsp;from Banco Popular shows. Salaries in the central government in San Juan are more than 90% higher than in the private sector. Even across comparable skill sets, the wage disparity persists.</p></blockquote><p>In other words, life is pretty good for the people&nbsp;<a href="https://danieljmitchell.wordpress.com/2011/07/15/two-pictures-that-perfectly-capture-the-rise-and-fall-of-the-welfare-state/">riding in the wagon</a>, but Puerto Rico doesn’t have enough productive people to pull the wagon.</p><p>So we’re back to where we started. It’s the Greece of the Caribbean.</p><p>P.S. This column has focused on fiscal policy, but it’s important to recognize that there are many other bad policies hindering prosperity in Puerto Rico. And some of them are the result of Washington politicians rather than their counterparts in San Juan.&nbsp;<a href="http://www.foxnews.com/opinion/2015/07/02/washington-s-role-in-puerto-rico-s-mess.html">Nicole Kaeding</a>&nbsp;and&nbsp;<a href="http://panampost.com/nicholas-zaiac/2015/07/01/how-the-feds-helped-bankrupt-puerto-rico/">Nick Zaiac</a>&nbsp;have explained that the Jones Act and the minimum wage are particularly destructive to the territory’s economy.</p><p>P.P.S. At least Puerto Rico is still a&nbsp;<a href="https://danieljmitchell.wordpress.com/2014/09/07/whats-the-best-tax-haven-for-american-citizens/">good tax haven</a>&nbsp;for American citizens.</p></div></div></div>Mon, 06 Jul 2015 18:53:09 +0000Chris Edwards1468 at http://www.downsizinggovernment.orgChris Christie’s Fiscal Recordhttp://www.downsizinggovernment.org/chris-christies-fiscal-record
<div class="field field-name-field-authors field-type-taxonomy-term-reference field-label-hidden"><div class="field-items"><div class="field-item even">Nicole Kaeding</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"><p>Chris Christie joins the Republican field for president with an announcement at his former high school. Christie, the current governor of New Jersey, has worked to improve New Jersey’s fiscal situation. Christie earned a respectable grade of “B” on both the&nbsp;<a href="http://object.cato.org/sites/cato.org/files/pubs/pdf/GRC2012.pdf">2012</a>&nbsp;and<a href="http://object.cato.org/sites/cato.org/files/pubs/pdf/fprc-on-americas-governors_1.pdf">2014</a>&nbsp;Cato’s Fiscal Policy Report Cards, partly due to his repeated vetoes of the legislature’s tax increases.</p><p>Christie has vetoed personal income tax increases&nbsp;<a href="http://www.app.com/story/news/politics/new-jersey/2015/06/26/christie-vetoes-budget-pensions/29324503/" target="_blank">five times in six years</a>, including just last week. The 2015 version of the tax increase would have raised the top personal income tax bracket from 8.97 percent to 10.75 percent on income over $1 million. It was coupled with a 15 percent surcharge on corporate income taxes. Together, these two tax increases would have raised $1.1 billion, an enormous tax hike.</p><p>Christie has tried to lower taxes on New Jersey residents several times. In 2012, he proposed a 10 percent cut to personal income taxes. He also has signed into law some business tax cuts, including a large package in 2011 that featured &nbsp;an energy tax cut.</p><p>However, Christie has promoted misguided tax policies as well. This year, he pushed to increase the state’s Earned Income Tax Credit to&nbsp;<a href="http://www.app.com/story/news/politics/new-jersey/2015/06/26/christie-vetoes-budget-pensions/29324503/" target="_blank">30</a>&nbsp;percent, up from 20 percent. He pushed to&nbsp;<a href="http://www.nj.com/politics/index.ssf/2014/04/christies_proposed_e-cigarette_tax_is_for_public_health_state_treasurer_says.html" target="_blank">increase taxes</a>&nbsp;on e-cigarettes in 2014. He supported a number of targeted tax credits to encourage companies to stay in New Jersey. He created the&nbsp;<a href="http://www.state.nj.us/treasury/taxation/noticegnjap.shtml" target="_blank">“Grow New Jersey”</a>&nbsp;tax credit which provides $5,000 to companies for each job created or retained in the state. Such tax provisions made the code more complex and do not generate broad-based growth.</p><p>Christie used his brash personal persona to garner support for spending cuts. In 2010 and 2011, he had a number of public debates with union officials over pay and benefits for state workers. It culminated in reforms to the&nbsp;<a href="http://www.nj.com/politics/index.ssf/2011/06/details_of_nj_public_worker_pe.html" target="_blank">state pension system</a>&nbsp;in 2011. The plan raised the retirement age, eliminated cost of living adjustments, and required state employees to contribute more to the system.&nbsp;</p><p>Despite the pension reform, the state’s budget has increased during Christie’s tenure, growing 15 percent from fiscal year 2011 to fiscal year 2015. New Jersey also has the&nbsp;<a href="http://www.standardandpoors.com/spf/upload/Events_US/US_PF_Webcast_Pensart1.pdf">fifth-highest</a>&nbsp;debt and unfunded pension liabilities per capita in the nation. And it has spent&nbsp;<a href="http://www.nj.com/politics/index.ssf/2015/02/group_decries_nj_corporate_subsidies_as_christie_r.html" target="_blank">$5 billion</a>&nbsp;in economic development subsidies since Christie took office.</p><div><p>Chris Christie has been an important check on the Democrat-controlled legislature in New Jersey by limiting tax increases and forcing through pension reform. However, he has supported economic development subsidies and several poor tax policies.</p></div><p>Note: Chris Christie joins a large presidential field comprised of a number of current and former Governors. Analysis of each governor’s fiscal record is available via the links below:</p><ul><li><a href="http://www.cato.org/blog/jeb-bushs-fiscal-record">Jeb Bush</a></li><li><a href="http://www.cato.org/blog/chafees-fiscal-record-rhode-island">Lincoln Chafee</a></li><li><a href="http://www.cato.org/blog/huckabees-support-higher-taxes-more-spending">Mike Huckabee</a></li><li><a href="http://www.cato.org/blog/bobby-jindals-fiscal-record">Bobby Jindal</a></li><li><a href="http://www.cato.org/blog/martin-omalleys-tax-increases">Martin O’Malley</a></li><li><a href="http://www.cato.org/blog/patakis-fiscal-recordhttp%3A/www.cato.org/blog/patakis-fiscal-record">George Pataki</a></li><li><a href="http://www.cato.org/blog/rick-perrys-fiscal-record">Rick Perry</a></li></ul></div></div></div>Wed, 01 Jul 2015 16:43:29 +0000Chris Edwards1467 at http://www.downsizinggovernment.orgPuerto Rico Edges to Defaulthttp://www.downsizinggovernment.org/puerto-rico-edges-default
<div class="field field-name-field-authors field-type-taxonomy-term-reference field-label-hidden"><div class="field-items"><div class="field-item even">Nicole Kaeding</div></div></div><div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even" property="content:encoded"><p><a href="http://www.washingtonpost.com/world/greece-will-close-banks-for-6-days-impose-limits-on-withdrawals/2015/06/29/f93264d0-1e3a-11e5-bf41-c23f5d3face1_story.html" target="_blank">Greece</a>&nbsp;is expected to default on its government debts tomorrow as its bailout package from the European Union (EU) expires. The country will also hold a referendum on Friday on whether to accept the latest round of terms from its EU funders. Greece continues to grab all the headlines, but there is another government closer to home that is in a similar situation: Puerto Rico. Over the weekend, the governor of the island announced that Puerto Rico is unable to repay its $70 billion in debt.</p><p>The&nbsp;<a href="http://www.washingtonpost.com/business/economy/puerto-rico-says-it-cannot-pay-its-debt-setting-off-potential-crisis-in-the-us/2015/06/28/cbae1bc4-1e05-11e5-84d5-eb37ee8eaa61_story.html?hpid=z1" target="_blank"><em>Washington Post</em></a>&nbsp;describes the situation:</p><blockquote><p>A U.S. commonwealth with a population of 3.6 million, Puerto Rico carries more debt per capita than any state in the country. The island has been staggering under the increasing weight of those obligations for years as its economy has tanked, triggering an exodus of island residents to the mainland not seen since the 1950s.</p><p>Meanwhile, the government has raised taxes, cut government employment and slashed pensions in a futile effort to get its debt burden under control. Those actions have only slowed the acceleration of debt creation, while harming efforts to reignite the economy.</p></blockquote><p>The island has several sources of debt comprising the $70 billion. Its debt-to-GDP ratio is 70 percent. The average U.S. state is closer to 15 percent. Rhode Island, the state with the highest debt-to-GDP ratio, is just under 20 percent. This infographic from the&nbsp;<a href="http://www.wsj.com/articles/puerto-rico-has-no-easy-path-out-of-debt-crisis-1435526355" target="_blank"><em>Wall Street Journal</em></a>&nbsp;shows the magnitude of Puerto Rico’s outstanding debt.</p><p><img src="http://object.cato.org/sites/cato.org/files/wp-content/uploads/puerto_rico.png" width="819" height="536" /></p><p>The&nbsp;<em>Washington Post</em>&nbsp;reports that its debt is compromised of several large types:</p><blockquote><p>The island’s web of debt includes general-obligation bonds, which Puerto Rico’s constitution says must be repaid even before government workers receive their pay.</p><p>But billions of dollars more in bonds were floated by public corporations that provide critical services on the island, including providing electric power, building roads and running water and sewer authorities. Beyond the bond debt, the island owes some $37 billion in pension obligations to workers and former workers.</p></blockquote><p>The island’s electricity company is expected to miss a payment this week, according to the<a href="http://www.wsj.com/articles/puerto-rico-has-no-easy-path-out-of-debt-crisis-1435526355" target="_blank"><em>Wall Street Journal</em></a><em>.</em></p><p>A larger challenge for Puerto Rico is that federal bankruptcy code prevents the island (and states) from filing bankruptcy. That gives Puerto Rico two choices. It can continue to work out a deal with creditors to refinance its outstanding debts, or it could push Congress to provide some sort of bailout.</p><p>The idea of&nbsp;<a href="http://www.downsizinggovernment.org/another-state-and-local-bailout" target="_blank">state bailouts</a>&nbsp;was discussed some in Congress in 2010 and 2011 as state budgets struggled to handle the effects of the Great Recession. The idea is just as bad now as it was then. Providing a bailout would reward Puerto Rican policymakers for their years of irresponsible choices and should be a non-starter in Congress.</p><p>Instead, Puerto Rico should continue to limit its spending to help lower its outstanding debt obligations. It will be an incredibly tough road to manage, but that is the cost of years of mismanagement and failing to acknowledge the realities of the island’s fiscal situation.</p></div></div></div>Mon, 29 Jun 2015 16:20:45 +0000Chris Edwards1466 at http://www.downsizinggovernment.org